When nearly instantaneously equity markets started to heave, the proximity of the severe equity selloffs to the US debt down-rating led to conclusions that the downgrade was to blame (an interpretation rife in South Africa as I personally encountered when interviewed for radio).
But was it? For as equities sold off, in the US and abroad, money surged into US Treasury bonds, lowering yields aggressively for 10-yr bonds at one stage to two percent.
That made the US Treasury an enhanced safe haven and not a downgraded, more risky, asset class.
It isn’t as if the US rating downgrade won’t have longer term consequences. But markets are saying that, whatever happens in the future, for now US finances are unimpaired no matter the liberties taken by politicians.
So the downgrade wasn’t necessarily a long-term false alarm, even if in the short-term some overstated its relevance completely.
Meanwhile a major second feature entered the jousting lists in early August 2011. The world economy was slowing down led by the US which had had a very poor first half, some of it explainable due to temporary headwinds, but partly to perhaps deeper long-lasting concerns.
Ere long the accumulating anxieties jumped the fence. The slowdown became hailed as the rising risk of a double-dip recession in the US, pulling down the global growth expectations with it.
Many had been suspicious all along about the long lasting depressant effect of debt burdens, the difficulty to regain vigorous growth, the lack of lasting success following massive policy interventions to get growth going again, the sense of hopeless stagnation.
When the evidence of slowdown gradually became visible and was initially presented as temporary, there was still some buy-in. But increasingly anxiety rose, not least because of the intensifying European debt crisis and the US debt ceiling debate.
Though the debt ceiling was lifted, the debt downgrading along with poor data suddenly made sentiment catch fire, greatly increasing the perception that a double-dip recession was imminent or already underway.
It was this that caused the massive equity selloffs (very much Made in America), at least to European eyes.
Federal Reserve indications that it would ease monetary policy by keeping rates low through mid-2013 and that it would maintain the size of its balance sheet (and perhaps lengthen its term structure) while considering yet more tools (QE3?) favourably impacted, but this lasted only for a night as the next rumour hit.
After the EU peripheral troubles in Greece, Ireland and Portugal, June-July had seen Spain and Italy drawn into the maelstrom too. Market anxiety now further extended its reach to question the remaining French AAA+ status.
As rumours circled about a possible French downgrade, exposed private banks were sold off heavily. Market panic jumped yet another fence, heavily selling off US equities, especially banks.
It was this that really caused the massive equity selloffs (spillover contagion with an EU origin), at least to American eyes.
But then in quick succession it materialised that French (and Italian and Spanish) government actions were bolstering their fiscal deficit reduction and growth initiatives, the rating agencies weren’t going to downgrade French bonds, and the US economic data, turned out to be less dire than imagined.
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